Will a $9 iPhone 3 Undercut Sales of Apple's iPhone 5?

AT&T (T) is now offering an $9 iPhone. Granted, that price is for a refurbished 3 G3S-8G. But the handset provides the same essential functions as a brand new $199 iPhone 4-16GB. It can download the great majority of the 500,000-plus apps from the Apple (AAPL) App Store. It has a basic camera. And perhaps most important, it runs on AT&T's 3G network. None of the iPhones the carrier offers operate on its super-fast new 4G network -- an issue that many analysts think will hold back iPhone sales.

Analysts expect the iPhone 5 -- which will probably be launched after Labor Day -- will cause serious price cuts on all earlier model -- Apple's standard method of clearing old inventory to give to the newest gadget less competition from older models.
The iPhone 4 may drop as low as $50, according to tech website GizmoCrunch.

This technique has been successful in the past, but it may not be in the future. Apple needs the iPhone 5 to be a huge success. The company sold 18.65 million iPhones in the last quarter, a 113% improvement over a year earlier. That makes the iPhone Apple's most important product in terms of revenue contribution -- well ahead of its Mac computers and laptops, iPods, and even iPads for now.

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But a $9 iPhone 3 and low-priced iPhone 4s may undermine demand for the newest handset. The iPhone 5 is expected to bring to the table a new, faster processor, access to Apple's new iCloud features which allow people to store songs and e-mail on remote servers, and more touchscreen features. The handset will sell for between $199 and $299 with a two-year subscriber plan, if the past is any indication.

The challenge that Apple faces is that the iPhone 5's new feature set may not be adequate to draw customers away from the cheaper, older models. Of particular concern is its inability to use 4G technology. Several smartphone companies, among them Asian giant HTC (HTCXF), already have lines of handsets that run on the super-fast networks, which make it possible to watch streaming video without stutters and surf the web at a pace which is close to that of a cable modem. Some customers may chose to wait until next year to see if the iPhone 6 will be 4G compatible.

For the time being, it's possible many consumers may decide that older versions of the iPhone are adequate for most of their needs. And if those $9 iPhones do too well, the iPhone 5 will not.